Federal Court judgment warns on Virgin bondholder rights

A court judgment has reassured Virgin Australia bondholders they have the right to put up a new offer for the airline.

Virgin Australia aircraft await their fate at Brisbane international airport. Picture: Patrick Hamilton/AFP

Bondholders in Virgin Australia have been buoyed by a Federal Court judgment affirming their right to present an alternative proposal for the airline at the next creditors meeting.

Judge John Middleton published his ruling on Wednesday in response to the bondholders’ case seeking access to confidential details­ of Virgin’s prospective sale to Bain Capital.

Although their application was denied, Justice Middleton reaffirmed­ bondholders’ right to propose a new deed of company arrangement (DOCA) at the creditors meeting on August 22.

“Whatever the administrators (Deloitte) may have conveyed to the applicants (bondholders Broad Peak and Tor), there is no doubt that the applicants have the ability at the next meeting of creditors to propose a DOCA,” said the judgment.

He went on to say that denying the bondholders access to confidential details of the deal now should not harm their progress, in light of the fact Deloitte was still required to provide sufficien­t information ahead of the creditors meeting.

Justice Middleton also sounded a warning to administrators that the sale process could be delayed or even terminated if they did not meet these obligations.

“If a creditor at the meeting needs more time or information to consider their position, this could be a reason to adjourn the meeting of creditors,” he said.

“If sufficient information is not provided which is material to creditors in reaching a decision on a proposed DOCA … this could be a ground for the court to later terminate the DOCA. Neither of these scenarios is desirable.”

Tension between the bondholders and administrators Deloitt­e has been rising, since their initial proposal lodged on June 24 was rejected.

In submissions to the court, and in a letter to the committee of inspection, Deloitte suggested the bondholders’ proposal fell well short of what was required to rescue Virgin Australia, and had too many conditions attached.

“(The) BP&T proposal did not deliver any certainty or guaranteed return to creditors, nor did their proposal provide any cash for a dividend to be paid to unsecured creditors,” said the letter. “At no time has BP&T provided any evidence of funding (either for interim funding or to support their recapitalisation proposal).”

The bondholders hit back in the Federal Court on Friday, saying Deloitte had demanded payment of $625m within 24 hours of lodging their proposal, which was an impossible deadline to meet across international timelines.

Barrister Ian Jackman also questioned the structure of the deal with Bain, given the administrators had suggested it could not be voted down by the creditors meeting.

“We are confused as to how the administrator, no doubt with advice, has come to the conclusion that it is a fait accompli and whatever happens at the second­ meeting can’t change the asset sale to Bain,” Mr Jackman told the court.

The bondholders were ordered­ to pay costs for Friday’s hearing in the Federal Court but were not deterred by the failure to access confidential details of the Bain transaction.

“We look forward to engaging with the administrators in this regard­, as well as with other Virgin stakeholders, to present the recapitalisation plan which we believe is in the best interests of Virgin employees, stakeholders and creditors, including the thousands of Australian bondholders and institutions that have already invested $2bn in Virgin Australia,” said a spokesman for the bondholders.

Virgin Australia went into admin­istration on April 21 with debts of $6.8bn owed to more than 10,000 creditors.

Bondholders account for the largest sum owed, $2bn, and have proposed a debt for equity plan to avoid Virgin Australia being sold.